HELP! New investor bought a lemon in SoCal - seeking guidance

33 Replies | Los Angeles County, California

Hi @Juan Escarcega ! If it helps, I can get you in touch with a great lender who is also an accountant that could at least talk to you about the options and penalties of selling. And my company works with a lot of active flippers who you may be able to partner with or sell to quickly. Let me know if I can be of help!

Wow, thank you everyone for the input!

I spoke with a lawyer and he pretty much confirmed Michael's opinion on pursuing it in court; pursuing anything under 100K is a loss, so I'll likely sell unless another opportunity presents itself... 

Feel free to send me your best realtor recommendations!

Here are some answers to the questions below.

Eric:

I'm looking into getting an estimate this week, but I speculate at least 50K-100K based on other comps in the area (although I'm not sure how much in dollars any of these issues would factor into the pricing from a market stand point of view, other than to negotiate in the worth of cost and risk to the buyer).

Ali:

Getting estimates from GC's and architects has been a little bit of a challenge with quotes all over the place, as I find them a bit reluctant to work out multiple plans and prefer to focus on one at a time. Will definitely check out the @Jeff Greenberg meetup next month, thanks!

----Maybe I should just keep calling around/find better contractors?

Dennis:

For the scope of construction deemed necessary by the city, it's hard to be certain without shelling out another 10K-15K for architectural plans and holding costs. All of the building plans and documents I've gathered are tiny plot plan sketches at best with some poorly written cursive squiggled next to it for the description. My best guess is that someone converted a kitchen to a bedroom and cut a doorway into the diving wall between the to two units. The issue seems to be less of a structural issue and more so due to a lack of paperwork ever existing on the house, period. Everything comes up as inconclusive when I bring it to the city for them to examine.

Matt:

My inspection didn't mention anything about illegal construction, just said "as-is," which I guess technically there is legally no such thing in CA, according to the attorney I spoke with.

Joseph:

Checked out the link, seems pretty interesting but there are a couple of hang ups I see myself getting into as there have never been any legally recorded tenants on the property in addition to being forced to provide section 8 housing, which is a less attractive option. No go on AirBnB, highly frowned upon by the city with crazy rules and fines. RSO technically means I'd have to pay every guest a relocation fee (up to 20K/family).

Originally posted by @Dan Heuschele :

@Juan Escarcega

This does not help the OP any but I do not understand buying an RSO property.  The primary way coastal So Cal properties have significant cash flow is due to rent appreciation.  Take away the rent appreciation then the cash flow has to be achieved via a value add.  The problems with value adds is that they are typically one-time only events.  So assume a value add such as converting a duplex to a triplex results in an extra $2k/month the first year.  Each year of holding this $2K goes up at the RSO rate (3%) so it in effect will always be worth around $2K in today's dollars.

Versus purchasing outside an RSO zone. San Diego SFR rents have gone up on average ~$700/month in the last 5 years. I suspect LA is similar outside the RSO impacted properties. This $700 helps significantly with the cash flow but San Diego has a long history of rent appreciation exceeding inflation over the long term. So the rent is likely to continue to go up on a long term basis faster than inflation and faster than the 3% of the RSO property.

I think the primary reason the OP should sell is not because of the illegal construction, the holding costs, or the lack of finances but due to the RE being an RSO property.  However, add up all of the reasons for selling and I think what the OP should do seems pretty obvious.

Good luck

I owned a property in a RSO Zone.  It was not a good experience.  I know there is a podcast episode where someone in LA was doing very well buying RSO property.  Maybe listen to that and see what strategies he used.  But based on my experience, I'm with @Dan Heuschele

Thanks again everyone! I found a really great hourly and understanding architect that is working with me as I go. (hit me up for his info!!!) I should be getting building plans delivered today or tomorrow for a SFR C-of-O to the city this week, so wish me luck! I never hold my breath when it comes to the city, but it is supposed to be a simpler, over the counter type of plan check. Either way, I have given myself a RENT OR SELL deadline until the end of the month. Will keep you posted!

Seth:

I think the Ellis Act still requires a hefty payout, but the timing worked out so that I have been able to keep the property vacant and I'm occupying the other unit anyway.

Steve:

I spoke with some local realtors and would actually be in the ballpark of a break even point. My comps were pretty close and could even walk away with a few bucks (very few) in my pocket depending on the final sale price.

As for capital gains, I've been in the property for almost exactly a year and would need to qualify for an exemption, which if I did, I think I would be ok  based on the amount of time I've been here.

Mel: 

Thanks for the podcast recommendation. I feel like I've listened to it before but will definitely check it out again! Obviously I'm still new at this, but as a bootstrap investor, I picked this because it offered the most bang for my buck in a central location with the most affordable financing available.